Biocon’s Q4Y17 revenues declined 2.2% y-o-y, dragged down by small molecules and biologics.

Biocon’s Q4FY17 results disappointed as revenues declined 2% y-o-y and 10% q-o-q, missing our estimates by 17%. Ebitda margin compression of 570 bps q-o-q, means that the miss at the Ebitda level was sharp at 35.5%. Q4FY17 was also impacted by one-off revenue decline at Syngene; FY2018 revenue and margin guidance turned cautious following the commissioning of Malaysia facility. We see meaningful biosimilar revenue contribution only from FY2020. Sell

All-round revenue miss

Biocon’s Q4Y17 revenues declined 2.2% y-o-y, dragged down by small molecules and biologics, which declined by 2% y-o-y and research services, which dropped 14% y-o-y, though research services revenues also had a one-off impact from the outbreak of fire at the Syngene facility. Ebitda at Rs 1.8 bn was 36% lower than our expectations, as other expenses sharply increased by 17% y-o-y and even after adjusting for `170m forex loss, Ebitda missed estimates by 28%, largely driven by revenue miss. Consequently, PAT missed our estimate by 28%, declining 25% q-o-q. Net debt further increased to Rs 5 bn at the end of Q4FY17.

BIOS spent $250m on capex on the Malaysia facility, which is currently accounted for as CWIP. Apart from the capex, BIOS has also been capitalising all operating expenses and interest costs pertaining to the facility as the facility is not yet commissioned. Post the Malaysia tender win, operating and financial expenses and depreciation on $200 m gross block will now need to be booked through P&L from FY2018.

To offset this incremental $48m pre-tax impact, we estimate BIOS needs to generate incremental revenues of $70-80m annually, which we believe is unlikely. The management also turned cautious on FY2018 outlook and expects the commissioning of the facility to turn earnings dilutive in FY2018, a significant change from Q3FY17 commentary, where it was confident of maintaining its margins through incremental revenues from the facility.

Biosimilar launches only likely to add from FY2019 — reiterate SELL

The management expects approvals of trastazumab and peg-filgrastim in the next 12-18 months in the US and EU and expects to file insulin glargine in the US in the coming months. For Biosimilar Lantus, a 30-month stay will push potential launch in the US to FY2020, with EU launches likely from FY2019 given the process for national licences and reimbursement approvals in individual EU countries. Similarly, for biosimilar Herceptin, we expect EU launches in FY2019, with US launch likely in FY2020 given the settlement on the ’213 patent, though we remain cautious on the addressable market for Herceptin given sub-cu switch. BIOS is currently trading at 45x FY2018 EPS and 40X FY2019 EPS. We cut our FY2018-19 EPS by 5% each, and retain our `605/share valuation. Lantus filing in the US is the next key catalyst. Sell.

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ong>Highlights from Q4 results

Syngene updates: Syngene reported revenue decline of 12% y-o-y in Q4FY17 as a fire outbreak damaged 10% of overall infrastructure. According to the company, the damage was primarily in discovery research and the damaged infrastructure will remain non-operational for most part of FY2018. In the meantime, the management expects some capacity constraints, though the company has relocated some projects and is operating some business on double shift to minimise losses.

Syngene is guiding for normalisation of revenue growth to 20% levels in FY2018 driven by recently commissioned formulations facility and contribution from biologics business. The management expects 2-3% impact on margin in FY2018.

Biosimilar updates: The management expects approvals of trastazumab and pegfilgrastim in the next 12-18 months in the US and EU and expects to file insulin glargine in the US in the coming months. For Biosimilar Lantus, given that there are existing formulation patents running until Jan-2024, we expect Sanofi to sue BIOS/MYL applicants to delay biosimilar launches. Factoring in a 60-day acceptance window by the FDA, filing of the patent infringement suit by Sanofi, and the mandatory 30-month stay extends potential approval and launch to H2’CY2019 or FY2020. This is also predicated on it being able to successfully prove non-infringement on Lantus formulation patents.